Naturally, regulators have now decided that figuring out how to curb executive pay should be a priority. In September, this was one of the hot topics during the G-20 summit in Pittsburgh. More recently, the Obama administration's pay czar, Kenneth Feinberg, imposed a pay cap on execs at bailed-out banks, and the Federal Reserve said it would look more closely at executive pay at bank holding companies.

All of this is an attempt to fit the story of the financial crash into the theme of Wall Street greed. Well, sure. Wall Street did its utmost to profit from the housing bubble and gave out bonuses that were unwarranted.

But the problem with the executive-salary narrative is that it wrongly discounts the heavy hand of government, which was complicit in every move that inflated the bubble. Hindsight tells the tale: The root cause was the U.S. government's campaign, spurred by both political parties, to extend home ownership to people who could not afford it.

Rating agencies, operating within a government-created oligopoly, stamped piles of toxic mortgages with their highest mark of approval: AAA.

Everything depended on housing prices rising ever higher. After all, everyone knew housing only goes up, right? Naturally, Wall Street made the most of this, and pumped out a dizzying array of financial products to amp up the leverage. Many took undue risks in the knowledge that institutions judged "too big to fail" would be bailed out by Uncle Sam, and they were right.

But there's little evidence that Wall Street's bonus system was a prime cause of the disaster. Jeffrey Friedman, a visiting scholar at the University of Texas, says it's more likely that top executives simply didn't understand the risks their firms were taking.

Friedman points out that most of the mortgage-backed securities purchased by banks were AAA, even though bonds rated AA and lower would have been more profitable. And why were they buying mortgage-backed bonds in the first place? Bank capital standards, imposed by public policy.

Under international rules agreed to by G-20 regulators, banks would have been required to set aside a bigger capital cushion for individual mortgages and commercial loans than for mortgage-backed securities.

A key point is that not all institutions behaved this way. J.P. Morgan Chase avoided mortgage-backed securities and its different approach represents what Friedman, in a Wall Street Journal piece, called "the beating heart of capitalism."

The free market "spreads a society's bets among a variety of different ideas," he wrote. "That, not the pursuit of self-interest, is the secret of capitalism's achievements."

The danger, then, is a heavy-handed regulatory "solution" that encourages herd behavior and forecloses the freedom to pursue different approaches to a given set of challenges. As it sorts through all this, Congress should strive simply to align incentives with the public interest.

As the Hudson Institute's Irwin Stelzer argues, everyone involved should pay a penalty for failure.

Require that lenders bear some of the cost if they make stupid loans. Base executive bonuses on longer review periods and impose clawbacks in certain situations. Require that bond-rating agencies be paid in part with the securities they rate; in other words, make them "eat their own cooking."

And here's an intriguing idea: Put some of the regulators' pay in escrow, to be forfeited to the Treasury if the policy fails in its stated purpose.

The current fascination with executive pay is an easy path for politicians, but it's not likely to bring long-term improvement in the functioning of our financial markets.